Sustainability of masala bond market a challenge: Moody's

Rating agency Moody's Investors Service said on Tuesday the masala bond market could become an attractive funding avenue for state-owned companies and large non-banking finance companies (NBFCs). But for wider acceptance of bonds issued by Indian companies overseas, a proper market should take shape that would have enough rupee liquidity.

Moody's expects selective issuance by some of the largest Indian NBFCs, government-related issuers and state-owned enterprises over the next 12 months.

According latest data from the commerce ministry and the Reserve Bank of India (RBI), $5.5-billion equivalent of masala bonds have already been issued. Indian Railway Finance Corp, Power Finance Company, the government-backed India Infrastructure Finance Corp (IIFCL) and mortgage financier Housing Development Finance Corp (HDFC) have already announced their plans to raise money through masala bonds. HDFC recently said it would be raising $750 million through rupee bonds in the overseas markets. The Indian Railways board has allowed it to raise $1 billion through debt, of which some part will be through masala bonds.

But the sustainability of such a finance option remains a key challenge, Moody's said.  

"In the current economic environment, we expect investors to be cautious in taking on currency risks from emerging markets. Offshore rupee liquidity, secondary market trading, and a long-term benchmark yield curve will all need to come into being before the masala bond market can become a sustainable funding source for Indian issuers," said Alka Anbarasu, a senior analyst at Moody's.

 

However, as the number of issuances increases, secondary trading in the instruments will help in setting a benchmark for future deals, Moody's said.

Masala bonds will provide diversification from the relatively shallow domestic bond market, the rating agency said, and as the rupee-denominated bonds will be offered and settled in US dollars, it made it easier for foreign investors to participate.

In the onshore market, foreign investors are allowed to invest only a little bit more than $51 billion in local corporate bonds.  

The Reserve Bank of India (RBI) recently allowed companies to raise rupee resources from overseas, in which the Indian companies do not hold any currency risk as the borrowing and payment both happen in rupee. However, the investors in these bonds would have to bear the currency risk as the investment and settlement would happen in a foreign currency.

Even as the government and RBI are trying their best to make the rupee more acceptable in the overseas market, such internationalisation of the local currency has not yet taken shape. Issuances of masala bonds is one such step, but even for that, rupee liquidity is a must.

These firms regularly tap the Indian corporate debt market and enjoy the highest domestic rating. In the overseas market though, their ratings are capped by the sovereign's rating, which is just about investment grade.